Investment Valuation	3
	Contents	11
	CHAPTER 1 Introduction to Valuation	21
	A Philosophical Basis for Valuation	21
	Generalities about Valuation	22
	The Role of Valuation	26
	Conclusion	29
	Questions and Short Problems	29
	CHAPTER 2 Approaches to Valuation	31
	Discounted Cash Flow Valuation	31
	Relative Valuation	39
	Contingent Claim Valuation	43
	Conclusion	45
	Questions and Short Problems	45
	CHAPTER 3 Understanding Financial Statements	47
	The Basic Accounting Statements	47
	Asset Measurement and Valuation	49
	Measuring Financing Mix	56
	Measuring Earnings and Profitability	62
	Measuring Risk	67
	Other Issues in Analyzing Financial Statements	73
	Conclusion	75
	Questions and Short Problems	75
	CHAPTER 4 The Basics of Risk	78
	What is Risk?	78
	Equity Risk and Expected Return	79
	Alternative Models for Equity Risk	91
	A Comparative Analysis of Equity Risk Models	96
	Models of Default Risk	97
	Conclusion	101
	Questions and Short Problems	102
	CHAPTER 5 Option Pricing Theory and Models	107
	Basics of Option Pricing	107
	Determinants of Option Value	109
	Option Pricing Models	110
	Extensions of Option Pricing	127
	Conclusion	129
	Questions and Short Problems	129
	CHAPTER 6 Market Efficiency—Definition, Tests, and Evidence	131
	Market Efficiency and Investment Valuation	131
	What Is an Efficient Market?	132
	Implications of Market Efficiency	132
	Necessary Conditions for Market Efficiency	134
	Propositions about Market Efficiency	134
	Testing Market Efficiency	136
	Cardinal Sins in Testing Market Efficiency	140
	Some Lesser Sins That Can Be a Problem	141
	Evidence on Market Efficiency	142
	Time Series Properties of Price Changes	142
	Market Reaction to Information Events	150
	Market Anomalies	154
	Evidence on Insiders and Investment Professionals	162
	Conclusion	169
	Questions and Short Problems	170
	CHAPTER 7 Riskless Rates and Risk Premiums	174
	The Risk-Free Rate	174
	Equity Risk Premium	179
	Default Spreads on Bonds	197
	Conclusion	200
	Questions and Short Problems	200
	CHAPTER 8 Estimating Risk Parameters and Costs of Financing	202
	The Cost of Equity and Capital	202
	Cost of Equity	203
	From Cost of Equity to Cost of Capital	230
	Best Practices at Firms	241
	Conclusion	242
	Questions and Short Problems	243
	CHAPTER 9 Measuring Earnings	249
	Accounting versus Financial Balance Sheets	249
	Adjusting Earnings	250
	Conclusion	267
	Questions and Short Problems	269
	CHAPTER 10 From Earnings to Cash Flows	270
	The Tax Effect	270
	Reinvestment Needs	278
	Conclusion	288
	Questions and Short Problems	289
	CHAPTER 11 Estimating Growth	291
	The Importance of Growth	291
	Historical Growth	292
	Analyst Estimates of Growth	302
	Fundamental Determinants of Growth	305
	Qualitative Aspects of Growth	321
	Conclusion	322
	Questions and Short Problems	322
	CHAPTER 12 Closure in Valuation: Estimating Terminal Value	324
	Closure in Valuation	324
	The Survival Issue	338
	Closing Thoughts on Terminal Value	340
	Conclusion	341
	Questions and Short Problems	341
	CHAPTER 13 Dividend Discount Models	343
	The General Model	343
	Versions of the Model	344
	Issues in Using the Dividend Discount Model	364
	Tests of the Dividend Discount Model	365
	Conclusion	368
	Questions and Short Problems	369
	CHAPTER 14 Free Cash Flow to Equity Discount Models	371
	Measuring What Firms Can Return to Their Stockholders	371
	FCFE Valuation Models	377
	FCFE Valuation versus Dividend Discount Model Valuation	392
	Conclusion	396
	Questions and Short Problems	396
	CHAPTER 15 Firm Valuation: Cost of Capital and Adjusted Present Value Approaches	400
	Free Cash flow to the Firm	400
	Firm Valuation: The Cost of Capital Approach	403
	Firm Valuation: The Adjusted Present Value Approach	418
	Effect of Leverage on Firm Value	422
	Adjusted Present Value and Financial Leverage	435
	Conclusion	439
	Questions and Short Problems	439
	CHAPTER 16 Estimating Equity Value per Share	443
	Value of Nonoperating Assets	443
	Firm Value and Equity Value	460
	Management and Employee Options	462
	Value per Share When Voting Rights Vary	468
	Conclusion	470
	Questions and Short Problems	471
	CHAPTER 17 Fundamental Principles of Relative Valuation	473
	Use of Relative Valuation	473
	Standardized Values and Multiples	474
	Four Basic Steps to Using Multiples	476
	Reconciling Relative and Discounted Cash Flow Valuations	486
	Conclusion	486
	Questions and Short Problems	487
	CHAPTER 18 Earnings Multiples	488
	Price-Earnings Ratio	488
	The PEG Ratio	507
	Other Variants on the PE Ratio	517
	Enterprise Value to EBITDA Multiple	520
	Conclusion	528
	Questions and Short Problems	528
	CHAPTER 19 Book Value Multiples	531
	Price-to-Book Equity	531
	Applications of Price–Book Value Ratios	541
	Use in Investment Strategies	550
	Value-to-Book Ratios	552
	Tobin’s Q: Market Value/Replacement Cost	557
	Conclusion	559
	Questions and Short Problems	559
	CHAPTER 20 Revenue Multiples and Sector-Specific Multiples	562
	Revenue Multiples	562
	Sector-Specific Multiples	591
	Conclusion	597
	Questions and Short Problems	597
	CHAPTER 21 Valuing Financial Service Firms	601
	Categories of Financial Service Firms	601
	What is Unique about Financial Service Firms?	602
	General Framework for Valuation	603
	Discounted Cash Flow Valuation	604
	Asset-Based Valuation	619
	Relative Valuation	619
	Issues in Valuing Financial Service Firms	625
	Conclusion	627
	Questions and Short Problems	628
	CHAPTER 22 Valuing Firms with Negative or Abnormal Earnings	631
	Negative Earnings: Consequences and Causes	631
	Valuing Negative Earnings Firms	635
	Conclusion	659
	Questions and Short Problems	659
	CHAPTER 23 Valuing Young or Start-Up Firms	663
	Information Constraints	663
	New Paradigms or Old Principles: A Life Cycle Perspective	664
	Venture Capital Valuation	666
	General Framework for Analysis	668
	Value Drivers	679
	Estimation Noise	681
	Implications for Investors	682
	Implications for Managers	683
	The Expectations Game	683
	Conclusion	685
	Questions and Short Problems	686
	CHAPTER 24 Valuing Private Firms	687
	What Makes Private Firms Different?	687
	Estimating Valuation Inputs at Private Firms	688
	Valuation Motives and Value Estimates	708
	Valuing Venture Capital and Private Equity Stakes	713
	Relative Valuation of Private Businesses	715
	Conclusion	719
	Questions and Short Problems	719
	CHAPTER 25 Aquisitions and Takeovers	722
	Background on Acquisitions	722
	Empirical Evidence on the Value Effects of Takeovers	725
	Steps in an Acquisition	725
	Takeover Valuation: Biases and Common Errors	744
	Structuring the Acquisition	745
	Analyzing Management and Leveraged Buyouts	750
	Conclusion	754
	Questions and Short Problems	755
	CHAPTER 26 Valuing Real Estate	759
	Real versus Financial Assets	759
	Discounted Cash Flow Valuation	760
	Comparable/Relative Valuation	779
	Valuing Real Estate Businesses	781
	Conclusion	783
	Questions and Short Problems	783
	CHAPTER 27 Valuing Other Assets	786
	Cash-Flow-Producing Assets	786
	Non-Cash-Flow-Producing Assets	795
	Assets with Option Characteristics	797
	Conclusion	798
	Questions and Short Problems	799
	CHAPTER 28 The Option to Delay and Valuation Implications	801
	The Option to Delay a Project	801
	Valuing a Patent	809
	Natural Resource Options	816
	Other Applications	822
	Conclusion	822
	Questions and Short Problems	823
	CHAPTER 29 The Options to Expand and to Abandon: Valuation Implications	825
	The Option to Expand	825
	When Are Expansion Options Valuable?	832
	Valuing a Firm with the Option to Expand	835
	Value of Financial Flexibility	837
	The Option to Abandon	840
	Reconciling Net Present Value and Real Option Valuations	843
	Conclusion	843
	Questions and Short Problems	844
	CHAPTER 30 Valuing Equity in Distressed Firms	846
	Equity in Highly Levered Distressed Firms	846
	Implications of Viewing Equity as an Option	848
	Estimating the Value of Equity as an Option	851
	Consequences for Decision Making	856
	Conclusion	859
	Questions and Short Problems	859
	CHAPTER 31 Value Enhancement: A Discounted Cash Flow Valuation Framework	861
	Value-Creating and Value-Neutral Actions	861
	Ways of Increasing Value	862
	Value Enhancement Chain	879
	Closing Thoughts on Value Enhancement	884
	Conclusion	885
	Questions and Short Problems	885
	CHAPTER 32 Value Enhancement: Economic Value Added, Cash Flow Return on Investment, and Other Tools	889
	Economic Value Added	890
	Cash Flow Return on Investment	904
	A Postscript on Value Enhancement	910
	Conclusion	911
	Questions and Short Problems	911
	CHAPTER 33 Probabilistic Approaches in Valuation: Scenario Analysis, Decision Trees, and Simulations	914
	Scenario Analysis	914
	Decision Trees	919
	Simulations	928
	An Overall Assessment of Probabilistic Risk-Assessment Approaches	939
	Conclusion	941
	Questions and Short Problems	941
	CHAPTER 34 Overview and Conclusion	945
	Choices in Valuation Models	945
	Which Approach Should You Use?	946
	Choosing the Right Discounted Cash Flow Model	949
	Choosing the Right Relative Valuation Model	953
	When Should You Use the Option Pricing Models?	957
	Conclusion	958
	References	959
	Index	974